Securities and Exchange Commission v. One Or More Unknown Traders In The Securities Of Onyx Pharmaceuticals, Inc.
Filing
42
OPINION AND ORDER re: 17 MOTION to Dismiss the Complaint and to Vacate, or in the Alternative to Modify, the July 10, 2013 Order. filed by Dhia Jafar, Omar Nabulsi.For the foregoing reasons, Defendants motion to dismiss the complaint is GRAN TED without prejudice. The SEC is granted leave to file an amended complaint without 30 days.The Courts July 10, 2013 Order Freezing Assets and Granting Other Relief is hereby clarified to state that it applies to $2,527,295 of assets in the acc ount held at Citigroup Global Markets, Inc. and/or its affiliates under the name FFA Private Bank SAL, account number 62301460.The Clerk of Court is directed to terminate the motion at Docket No. 17. (Signed by Judge J. Paul Oetken on 11/21/2013) (js)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
SECURITIES AND EXCHANGE
:
COMMISSION,
:
Plaintiff,
:
:
-v:
:
ONE OR MORE UNKNOWN TRADERS IN
:
THE SECURITIES OF ONYX
:
PHARMACEUTICALS, INC.,
:
Defendants. :
:
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13 Civ. 4645 (JPO)
OPINION AND ORDER
J. PAUL OETKEN, District Judge:
The Securities and Exchange Commission brought this action against unknown traders
who purchased call options for shares of Onyx Pharmaceuticals, Inc. shortly before Onyx made a
public announcement causing its shares to jump 51% in value. The SEC alleges that these
purchases were insider trades in violation of section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78j(b), and Rule 10b–5, 17 C.F.R. § 240.10b–5. The Court has frozen all
assets related to the trades in question until the final disposition of this case. Dhia Jafar and
Omar Nabulsi, who have identified themselves as two of the Defendants in this action, move to
vacate the order freezing their assets and dismiss the complaint for failure to state a claim, or, in
the alternative, to modify the order freezing their assets. Their motion to dismiss the complaint
is granted; however, the Court will permit the SEC to file an amended complaint within thirty
days. The freeze order is modified to apply to only $2,527,295 in the Citigroup account.
I.
Background
A.
Facts
The Court accepts the following allegations as true for purposes of this motion. On June
13, 2013, Amgen, Inc., a biotechnology company, made an unsolicited multibillion dollar offer
to purchase Onyx. (Compl. ¶ 15, Dkt. No. 1; Bulgozdy Decl. Ex. 1, Dkt. No. 36.) Amgen
followed up the next day, June 14, with a written proposal to purchase all of Onyx’s outstanding
shares for $120 a share. (Compl. ¶¶ 15, 19.) Amgen’s written proposal was forwarded to
Onyx’s board of directors the same day. (Id. ¶ 15.)
The board met twelve days later, on Wednesday, June 26, and rejected the offer—despite
the fact that Onyx’s stock was trading under $85 a share that day. (Id. ¶¶ 16, 22.) Two days
later, on Friday, June 28, Onyx informed Amgen that the board had rejected the offer. (Id. ¶ 17.)
Shortly after the market closed for the week, the Financial Post, a Canadian publication, posted
an article online discussing Amgen’s offer in detail. (Id. ¶ 18; Bulgozdy Decl. Ex. 1.) On
Sunday, June 30, Onyx announced Amgen’s offer and announced that the board had rejected the
offer because it “undervalued Onyx and its prospects.” (Compl. ¶ 19.) Onyx’s stock jumped to
over $131 a share the next day. (Id. ¶ 20.)
Beginning Wednesday, June 26―the day on which Onyx’s directors voted to reject
Amgen’s offer―there were three trades that the SEC characterizes as suspicious. First, on June
26, a trader used an account with Citigroup Global Markets, Inc. to purchase 255 call options for
shares of Onyx stock. (Id. ¶¶ 12, 22.) Each option gave the trader the right to purchase 100
shares of Onyx stock for $80 or $85 a share by a date in July 2013. (Id. ¶¶ 21–22.) The
Citigroup account had not been used to purchase Onyx call options during the past year. (Id.
¶ 23.) The number of call options the trader purchased on June 26 was significantly higher than
2
the average number of these options that had been purchased each day of the preceding two
weeks. 1 (Id.) Onyx’s stock closed at just over $84 on June 26. (Id. ¶ 22.)
The next day, Thursday, June 27, a trader used $151,000 from an account with Barclays
Capital, Inc. to purchase 544 call options to buy Onyx stock for $85 in July 2013. (Id. ¶¶ 12,
24.) Again, the number of call options purchased with the Barclays account was significantly
higher than the average number of Onyx’s July $85 call options that had been purchased each
day over the last two weeks. (Id.) The Barclays purchase, however, represented only about two
thirds of all the July $85 options purchased that day. (Id.) In other words, approximately 300
July $85 call options were sold to at least one other account on June 27. Onyx’s stock closed at
slightly over $85 a share that afternoon. (Id.)
The following day, Friday, June 28, was the day Onyx told Amgen that the board had
rejected Amgen’s offer. (Id. ¶ 17.) That same day, a trader used the Citigroup account to
purchase 50 July $90 call options and 270 July $92.50 call options for Onyx stock. (Id. ¶ 25.)
The number of call options in this purchase, too, was significantly higher than the average
number of July $90 and $92.50 call options that had been purchased each day since late May. 2
(Id.) After Onyx announced its rejection of Amgen’s offer on Monday, July 1, Onyx’s stock
closed at over $131 a share. (Id. ¶ 26.) The traders who bought call options using the Citigroup
1
From June 20 (the first day the July $80 call options were sold) through June 25, an average of
16 of these options were sold per day; on June 26, the Citigroup trader purchased 80 of these
options. (Compl. ¶ 23.) From June 11 (the first day the July $85 options were sold) through
June 25, an average of 6 of these options sold per day; on June 26, the Citigroup trader purchased
175 of these options. (Id.)
2
From May 23 (the first day July $90 call options were sold) through June 27, an average of 21
of these options sold per day; on June 28, the Citigroup trader purchased 50 of these options.
(Compl. ¶ 25.) From May 22 (the first day July $92.50 call options were sold) through June 27,
an average of 10 of these options sold per day; on June 28, the Citigroup trader purchased 270 of
these options. (Id.)
3
account profited over $2.2 million. (Id. ¶ 27.) The traders who bought call options using the
Barclays account profited at least $2.3 million. (Id.)
B.
Procedural History
The SEC filed this action on Wednesday, July 3, 2013, claiming that the purchases using
the Citigroup and Barclays accounts constituted insider trading. Specifically, the SEC alleges
that the traders who made the purchases on June 26, 27, and 28 did so after they were tipped
about Amgen’s offer to buy Onyx. (Id. ¶¶ 30–34.) The same day that the SEC filed this action,
Judge Jed S. Rakoff, in his capacity as Part I judge, temporarily froze the traders’ assets related
to the purchases in question and ordered them to appear and show cause why the freeze should
not be continued for the duration of this case. (Dkt. No. 3.) The three declarations submitted in
support of the freeze order application mirrored the allegations in the complaint, except that the
declaration of Andy Ganguly, a Staff Accountant for the SEC, contained more data about the
number of Onyx call options that had been sold each day over the preceding few weeks. (Dkt.
Nos. 28–30.) The traders did not file an opposition or appear to show cause, and on July 10, this
Court issued a freeze order which remains in effect. (Dkt. No. 4.)
In the meantime, the law firm DLA Piper had contacted the SEC to inform it that the firm
represented two traders who had made the trades using the Citigroup account. (Bulgozdy Decl.
¶ 4.) DLA Piper eventually revealed the identities of those traders to be Dhia Jafar and Omar
Nabulsi, both of whom are residents of Dubai. (Id. ¶ 5.) Jafar and Nabulsi contend that
Citigroup has improperly frozen all of their assets in the Citigroup account, not just the proceeds
from the trades at issue. (Defs.’ Mem. 3 at 8, Dkt. No. 21.) The movants and the SEC provide
slightly different accounts of their efforts to work together to clarify the scope of the freeze
3
Although the complaint does not name Jafar or Nabulsi as a Defendant, their filings are cited as
filed by “Defs.”
4
order; in short, the parties were unable to agree on clarifying language because either Citigroup
or the SEC was unsure about the amount of money that represented proceeds from the trades in
question. (Id. at 8–9; Bulgozdy Decl. ¶¶ 7, 10.) The SEC has not amended the complaint to
name Jafar or Nabulsi as a Defendant.
Jafar and Nabulsi filed this motion on July 23, 2013, and requested an expedited schedule
for briefing and oral argument. (Dkt. Nos. 17, 33.) The Court scheduled the motion to be fully
briefed by August 12, 2013, and held oral argument via telephone on August 14, 2013. (Dkt.
No. 31.) Jafar and Nabulsi move under Federal Rule of Civil Procedure 12(b)(6) to dismiss the
complaint for failure to state a claim. (Dkt. No. 17.) In the alternative, they seek to modify the
freeze order to clarify that it is limited to the $2,527,295 in profit attributable to the Onyx trades
in question. (Id.)
II.
Discussion
A.
Sufficiency of the Complaint
1.
Pleading Standard
The pleading standard for an insider trading claim is not straightforward. The Court must
begin with the general pleading standard, Federal Rule of Civil Procedure 8, which requires a
complaint to make a short, plain statement of a plausible claim for relief. Ashcroft v. Iqbal, 556
U.S. 662, 678–79 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). To
determine whether a complaint satisfies Rule 8, a court must accept all well-pleaded factual
allegations as true and draw all reasonable inferences in the plaintiff’s favor. Id. But the court
need not accept “[t]hreadbare recitals of the elements of a cause of action,” which are essentially
legal conclusions. Id. at 678 (citing Twombly, 550 U.S. at 555). After separating legal
conclusions from well-pleaded factual allegations, the court must determine whether those facts
make it plausible—not merely possible—that the defendants acted unlawfully. Id.
5
Insider trading claims are also subject to Rule 9(b) of the Federal Rules of Civil
Procedure. Rule 9(b) allows a party to allege a person’s state of mind in general terms, but
otherwise requires that circumstances constituting fraud be stated “with particularity.” This rule
is intended to provide defendants with fair notice of the plaintiff’s claim, to discourage plaintiffs
from making a cavalier decision to accuse a defendant of fraud, and to protect defendants from
strike suits. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F. 3d 87, 99 (2d Cir. 2007) (citing
Rombach v. Chang, 355 F.3d 164, 171 (2d Cir.2004)). Rule 9(b) is more demanding than Rule
8, but it does not replace Rule 8. The rules must be read in conjunction with one another.
Wright & Miller, Fed. Prac. & Proc.: Civil 3d § 1298 (2004 & Supp. 2013); see United States ex
rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) (applying Iqbal
to claims subject to Rule 9(b)); In re Xethanol Corp. Secs. Litig., No. 06 Civ. 10234 (HB), 2007
WL 2572088, *2 (S.D.N.Y. Sept. 7, 2007) (applying Twombly and Rule 9(b) to claims under
§ 10(b) of the Exchange Act).
In most cases, pleading fraud with particularity requires the plaintiff to specify the person
who made the misrepresentation, the time and place of the misrepresentation, the content of the
misrepresentation, and the reasons the misrepresentation was fraudulent. See Nakahata v. N.Y.Presbyterian Healthcare Sys., Inc., 723 F.3d 192, 197–98 (2d Cir. 2013) (citing Mills v. Polar
Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). But because insider tips are typically
passed on in secret, it is often impractical to require plaintiffs to allege these details with
particularity. Instead, Rule 9(b) may be relaxed to allow a plaintiff to plead facts that imply the
content and circumstances of an insider tip. SEC v. Aragon Capital Advisors, LLC, No. 07 Civ.
0919 (FM), 2011 WL 3278907, at *10 (S.D.N.Y. July 26, 2011) (quoting SEC v. Alexander, 160
F. Supp. 2d 642, 649 (S.D.N.Y. 2001)); see also In re Global Crossing, Ltd. Secs. Litig., No. 02
Civ. 0910 (GEL), 2005 WL 2990646, at *10 (S.D.N.Y. Nov. 7, 2005) (comparing approaches to
6
Rule 9(b) in insider trading cases). This relaxation should not completely eliminate the rigors of
Rule 9(b). Each of the cases in this Circuit relaxing Rule 9(b) ultimately relies on Segal v.
Gordon, 467 F.2d 602 (2d Cir. 1972), which held that “[w]hile the rule is relaxed as to matters
peculiarly within the adverse parties’ knowledge, [] allegations [on information and belief] must
then be accompanied by a statement of the facts upon which the belief is founded.” 467 F.2d at
608 (citing 2A James Wm. Moore, Moore’s Fed. Prac. ¶ 9.03, at 1928–29 (2d ed. 1968)). Rule
9(b) is therefore relaxed only to the following extent: if a tip took place under circumstances
known only to the defendant and the tipper, the plaintiff may plead a belief about the content and
the circumstances of the tip, coupled with particular facts supporting that belief.
As opposed to other circumstances constituting fraud, states of mind may be pleaded
“generally” under Rule 9(b). This provision is not “license to base claims of fraud on
speculation and conclusory allegations.” Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128
(2d Cir. 1994) (quoting O’Brien v. Nat’l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir.
1991)). Instead, a general allegation about the defendant’s state of mind must be supported by
specific facts that strongly support an inference 4 of fraudulent intent. Id. (citing Mills, 12 F.3d at
1176). The inference may be supported by the defendant’s motive and opportunity to defraud, or
4
The Second Circuit has applied the “strong inference” standard for pleading states of mind
under Rule 9(b) since the 1970s. See Ross v. A.H. Robins Co., 607 F.2d 545, 558 (2d Cir. 1979).
Congress adopted this standard in the Private Securities Litigation Reform Act (PSLRA) in 1995.
15 U.S.C. § 78u-4(b)(2)(A). The Supreme Court has interpreted “strong inference” as used in
the PSLRA to have different meaning than “strong inference” as defined by the Second Circuit.
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (“While adopting the
Second Circuit's ‘strong inference’ standard, Congress did not codify that Circuit's case law
interpreting the standard.”). Because the PSLRA applies only to private securities litigation, the
Supreme Court’s interpretation of “strong inference” as used in the PSLRA does not apply to
SEC enforcement actions. SEC v. Dunn, 587 F. Supp. 2d 486, 501 (S.D.N.Y. 2008) (“[H]ad
Congress wanted the PSLRA to restrain the SEC’s ability to plead securities fraud, it could have
said so easily.”). This opinion applies the Second Circuit’s pre-PSLRA “strong inference”
standard, not cases interpreting “strong inference” as used in the PSLRA. For a thorough
discussion of this issue, see Dunn, 587 F. Supp. 2d at 499–502.
7
by other facts showing that the defendant acted knowingly or recklessly. See id. (citing In re
Time Warner Inc. Secs. Litig., 9 F.3d 259, 268–69 (2d Cir. 1993)). In a somewhat confusing
elaboration of this standard, the Second Circuit has also held that a complaint subject to Rule
9(b) should be allowed to survive a motion to dismiss based on “fairly tenuous inferences” of
intent, because intent is a fact that a jury should find. In re DDAVP Direct Purchaser Antitrust
Litig., 585 F.3d 677, 693 (2d Cir. 2009) (citing Press v. Chem. Inv. Servs. Corp., 166 F.3d 529,
538 (2d Cir. 1999)). Nevertheless, it appears that complaints under Rule 9(b) are simultaneously
subject to the “strong inference” standard. See id. (citing Acito v. IMCERA Grp., Inc., 47 F.3d
47, 52 (2d Cir. 1995)).
In sum, to state an insider trading claim, the SEC must make particular factual allegations
supporting a reasonable inference that the defendants violated Section 10(b) and Rule 10b–5. If
facts about the content or circumstances of an insider tip are known only to the defendant and the
insider, the SEC may plead a belief about the tip coupled with particular facts supporting that
belief. The SEC’s allegations must strongly support an inference that the defendant acted with
intent to defraud.
2.
Elements of an Insider Trading Claim Under Section 10(b)
and Rule 10b–5
Section 10(b) of the Securities Exchange Act forbids the use of “any manipulative or
deceptive device or contrivance in contravention of” rules adopted by the SEC, if such use is “in
connection with” securities trading. 15 U.S.C. § 78j(b). The SEC adopted Rule 10b–5 to
prohibit, among other things, the use of an instrumentality of interstate commerce to “engage in
any act . . . which operates . . . as a fraud or deceit upon any person” in connection with
securities trading. 17 C.F.R. § 240.10b–5. Insider trading violates these laws. SEC v. Obus, 693
F.3d 276, 284 (2d Cir. 2012) (citations omitted). The Supreme Court has recognized two types
8
of insider trading. First, under the classical theory, a corporate insider trades shares of that
corporation using material nonpublic information in violation of the duty of trust and confidence
that corporate insiders owe to shareholders. Id. (citing Chiarella v. United States, 445 U.S. 222,
228 (1980)). Second, under the misappropriation theory, a corporate insider shares material
nonpublic information with a person who secretly misappropriates the information for personal
gain in the securities market, in violation of a fiduciary duty5 to the insider. Id. at 284–85 (citing
United States v. O’Hagan, 521 U.S. 642, 652 (1997); United States v. Chestman, 947 F.2d 551,
566 (2d Cir. 1991) (en banc)). Under both theories, the fiduciary duty of trust and confidence
requires the person who knows material nonpublic information either to abstain from trading on
the information or to make a disclosure before trading. Dirks v. SEC, 463 U.S. 646, 654 (1983)
(citing Chiarella, 445 U.S. at 227–235) (classical theory); O’Hagan, 521 U.S. at 655
(misappropriation theory). An insider can avoid liability by disclosing the relevant information
publicly so that she is not at a trading advantage over the corporation’s shareholders. Dirks, 463
U.S. at 654. A misappropriator can avoid liability by disclosing the fact that she will be trading
on confidential information to her source; by doing so, the misappropriator is no longer
deceiving her source, and thus she is not violating § 10(b). O’Hagan, 521 U.S. at 655.
The classical and misappropriation theories extend liability to tippers who share inside
information with another person for trading purposes, and to tippees who trade on the
information. Obus, 693 F.3d at 285. A tipper is liable for insider trading if she has a duty to
keep material nonpublic information confidential, she tips someone who could use the
5
The key element to any misappropriation case is a fiduciary relationship, or a functional
equivalent, between two parties. United States v. Falcone, 257 F.3d 226, 234 (2d Cir. 2001)
(Sotomayor, J.). The SEC adopted Rule 10b5–2 to define three categories of cases giving rise to
an actionable fiduciary duty. 17 C.F.R. § 240.10b5–2; see SEC v. Conradt, __ F. Supp. 2d __,
2013 WL 2402989, at *5 (S.D.N.Y. June 4, 2013). The SEC’s allegations in this case do not go
into enough detail to warrant discussion of the different circumstances giving rise to an
actionable duty.
9
information in connection with securities trading, and she personally benefits from giving the tip.
Id. at 289. By secretly exploiting material nonpublic information for personal gain, the tipper
deceptively breaches her duty to shareholders (classical theory) or her source (misappropriation
theory), violating § 10(b). See id. at 286. The personal benefit to the tipper can be any type of
benefit, including the satisfaction of making a gift to a relative or friend. Dirks, 463 U.S. at 663–
64.
A tippee’s liability is derivative of a tipper’s liability; absent a breach of duty by the
tipper, there can be no derivative breach by the tippee. Id. at 662. A tippee incurs liability for a
tipper’s breach if he knows or has reason to know that the tip was passed on in violation of a
fiduciary duty, and he knows that the tip is material nonpublic information, but he nevertheless
trades on the information or tips the information for his own personal benefit. Obus, 693 F.3d at
286–89. The tippee is said to inherit the tipper’s duty to abstain from trading or make the
appropriate disclosure. Id. at 288.
As this discussion has suggested, the requisite state of mind for all the foregoing theories
of liability is scienter. Id. at 286 (citing Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 167–68
(2d Cir. 1980)). Scienter is “a mental state embracing intent to deceive, manipulate, or
defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 & n.12 (1976). Negligence does not
rise to the level of scienter, id., but recklessness is sufficient in this circuit and ten others, Obus,
693 F.3d at 286 (citing SEC v. U.S. Envtl., Inc., 155 F.3d 107, 111 (2d Cir. 1998)). In this
context, reckless disregard for the truth is “highly unreasonable” conduct that is an “extreme
departure from the standards of ordinary care.” Id. (quoting SEC v. McNulty, 137 F.3d 732, 741
(2d Cir. 1998)). “In every insider trading case, at the moment of tipping or trading, just as in
securities fraud cases across the board, the unlawful actor must know or be reckless in not
knowing that [his] conduct [is] deceptive.” Id. Therefore, a tipper incurs liability for insider
10
trading only if she (1) knowingly or recklessly tips (2) information that she knows, or is reckless
in not knowing, to be material and nonpublic (3) in knowing or reckless violation of a duty to
keep the information confidential (4) for personal gain. Id. at 286–89. A tippee incurs liability if
all of those conditions obtain, plus (1) the tippee knows or is reckless in not knowing that the tip
is material nonpublic information, (2) the tippee knows or should know 6 that the tip was in
breach of a fiduciary duty, and (3) the tippee intentionally or recklessly uses the information by
trading or tipping for personal benefit. Id.
3.
Application
a.
Well-Pleaded Factual Allegations
The SEC’s well-pleaded factual allegations establish three main points. First, there was
material nonpublic information to be tipped. Amgen’s offer was a trustworthy sign that Onyx’s
stock was significantly undervalued. Onyx’s rejection of the offer suggested that even $120 a
share was an underestimation of Onyx’s true worth. There can be no real debate that the
complaint adequately alleges the materiality of this information; immediately following the
formal announcement, Onyx’s stock jumped 51% in value.
Second, the traders using the Citigroup and Barclays accounts placed substantial bets
that, by late July, Onyx’s stock would rise above values ranging from $80 to $92.50 a share.
These bets were placed starting the same day that Onyx’s directors voted to reject Amgen’s
offer. Onyx’s stock rose above $130 a share less than a week later.
6
In Dirks, the Supreme Court held that a tippee incurs liability if he “knows or should know”
that the tipper breached a fiduciary duty. 463 U.S. at 660. This standard is very similar to
negligence, but negligence is generally an insufficiently culpable state of mind for securities
fraud. See Ernst & Ernst, 425 U.S. 185. The Second Circuit has resolved this tension by
limiting the “knows or should know” standard to apply only to the tippee’s knowledge that the
tipper breached a fiduciary duty. Obus, 693 F.3d at 288. For all other elements of tippee
liability, scienter applies. Id.
11
Third, the details of Amgen’s offer somehow made their way into the Financial Post
before Onyx formally announced the offer.
From these main points, the SEC asks the Court to infer the elements of tippee liability.
The SEC does make direct allegations about the elements of tippee liability, but these allegations
cannot be characterized as well-pleaded factual allegations, and the Court is not bound to accept
them as true. The complaint alleges “upon information and belief” that the Defendants were
tipped, that the tipper expected to receive a benefit, and that the Defendants “knew, recklessly
disregarded, or should have known” that their trades were in breach of a fiduciary duty, “and/or”
that they had been tipped in violation of a fiduciary duty. (Compl. ¶¶ 31–33.) These allegations
are all belief and no information. Unless such beliefs can be reasonably inferred from the wellpleaded factual allegations, they amount to a “threadbare recital[]” of the elements of tippee
liability that does nothing to nudge the SEC’s claim “across the line from conceivable to
plausible.” Iqbal, 556 U.S. at 663, 680 (quoting Twombly, 550 U.S. at 570).
Nor is the Court bound to accept the SEC’s characterization of these trades as “risky” and
“highly suspicious.” (See, e.g., Compl. ¶ 5.) Calling these trades highly suspicious is
tantamount to saying that the trades strongly support an inference of insider trading—that is a
legal conclusion, not a fact, and it is a conclusion that is not supported by facts alleged in the
complaint.
b.
Reasonable Inferences
The complaint argues that the trades were highly suspicious based on their “timing, size,
and profitability,” the riskiness of the options involved, and the fact that no trader had used the
Citigroup account to buy Onyx call options in the previous year. (Id. ¶ 28.) Some of these
circumstances do raise mild suspicion. The Citigroup account’s trading history (or lack thereof)
in Onyx call options could raise suspicion if the Court inferred that the account was the sole
12
means of securities trading for each trader using the account. Furthermore, the timing and
profitability of the trades raise suspicion in tandem—one circumstance is not suspicious without
the other 7—and together, they do have the potential to raise “high suspicion” in conjunction with
other circumstances. But the complaint does not present other suspicious circumstances.
The size of the trades is not informative for several reasons. The SEC makes much of the
fact that, for example, the purchase of 50 July $90 call options on June 28, 2013 was a 138%
increase in the average number of the same call options (21) sold each day since the options were
first sold on May 23, 2013. (Id. ¶ 7.) The SEC does not indicate whether this average is actually
representative of the amount of options that sold per day between May 23 and June 28, or
whether the options were purchased in chunks, punctuated by long periods of inactivity. For
example, this average would result if almost nobody bought July $90 call options until the end of
June, and then traders purchased (say) 75 call options per day during the two weeks leading up to
June 28. 8 The historical average also fails to convey whether, on the same day as the trades in
question, other investors decided to purchase the same call options: even if the trades in question
were a significant jump from the previous week’s activity, the trades would be less suspicious if
7
It would not be suspicious if a trader bought options that immediately turned a modest profit, or
if a trader bought options that turned a significant profit over a long period of time.
8
The complaint itself demonstrates how these averages can be misleading. The SEC alleges that
traders bought 544 July $85 call options on June 27, 2013, a “1,294% increase” over the average
daily volume of 39. (Compl. ¶ 24.) But the complaint also alleges that the day before, on June
26, 2013, a trader bought 175 July $85 call options. (Compl. ¶ 22 (the Court assumes that “June
26, 2012” is a typo).) In this instance, the average daily volume of 39 was not representative of
recent trading activity.
13
other traders were making the same investment. 9 The historical average therefore communicates
insufficient information about whether the trades at issue were unusual in the context of recent
trading activity. The SEC also fails to indicate whether it was unusual for the average number of
July call options sold per day to spike near the end of June. Without clarification about the
distribution of past trades, other trading activity on the days in question, or trends in average
daily volume as a call option’s expiration date approaches, the historical average daily volume is
not a basis for inferring that the trades in question were suspicious.
Even if these purchases were unusually large, that information would not bear significant
weight. The accounts in question were omnibus accounts. (Id. ¶ 12.) Without background
knowledge about the number of traders using the account and their individual trading habits, the
total amount of Onyx call options purchased through the account does little to raise suspicion of
insider trading.
Finally, these trades were not risky enough to be characterized as “highly suspicious.”
Onyx’s stock had only recently dipped below $85 a share before the trades at issue. The stock
had closed at over $90 a share between April 9 and June 3, 2013, and at over $85 a share
between June 3 and June 19, 2013. 10 The trades at issue were bets that Onyx’s stock would hit
values ranging from $80 to $92.50 a share in late July—not an outrageous bet to make. While
these trades did carry some risk, all securities trades do.
9
The SEC characterizes the June 27 purchase of 544 July $85 call options as a “highly
suspicious” 1,294% increase over the historical average daily volume of 39, yet also concedes
that approximately 300 July $85 call options were sold to at least one other account the same
day. (See Compl. ¶¶ 23–24.) The complaint does not provide similar information about sameday activity for any of the other trades in question.
10
Courts may take judicial notice of public stock price quotations without converting a motion to
dismiss into a motion for summary judgment. Rinehart v. Akers, 722 F.3d 137, 149 n.9 (2d Cir.
2013) (quoting White v. Marshall & Ilsley Corp., 714 F.3d 980, 985 (7th Cir. 2013)).
14
105
Closing Price of Onyx Stock
Strike Price of Call Options Purchased
100
95
90
85
80
75
Taken as a whole, the circumstances surrounding these trades raise only mild suspicion.
The SEC’s other main points—the material information about Amgen’s offer and the apparent
leak to the Financial Times—are not enough to bridge the gap from possible to plausible tippee
liability.
Primarily, the allegations are insufficient to imply that anyone tipped the Defendants.
The SEC has not identified a person or a limited group of people who might have been the
tipper. The SEC has not alleged a preexisting relationship between the Defendants and Amgen
or Onyx that might be a basis for inferring that a tip had been passed on. The SEC has not
identified records of any communication between a potential tipper and the Defendants. And the
SEC has not identified a pattern of trading behavior that belies the Defendants’ knowledge about
specific steps in the negotiation process. Compare SEC v. Suterwalla, 2008 WL 9371764, at *4
(S.D. Cal. Feb. 4, 2008) (tippee made twelve different trades keyed to confidential events such as
conference calls). In the absence of these allegations or any other allegations supporting a link
between the Defendants and a tipper, the SEC has failed to meet the Rule 9(b) standard requiring
15
particularized facts to constitute the “information” portion of the “information and belief” on
which its allegations are based.
Moreover, the SEC has failed to allege facts that raise a strong inference of scienter.
Even if there was a tip—which it is not reasonable to infer from these facts alone—the SEC’s
allegations do not support a reasonable inference that the tip was in violation of a fiduciary duty,
much less that the Defendants knew or should have known about the violation. The complaint
does not contain any allegations about the confidentiality of the Amgen offer or the efforts, if
any, that either company made to keep the offer secret. Yet the SEC asks the Court to infer that
someone tipped the Defendants about the Amgen offer, and on that basis, to infer that the tipper
was deceptively breaching a fiduciary duty, then on that basis, to infer that the Defendants knew
or were reckless in not knowing that the tip (whatever its content) consisted of material
nonpublic information, and that Defendants knew or should have known that the tipper (whoever
she was) breached a fiduciary duty by passing on the tip. Piling inference upon inference in this
way does not provide the requisite strong support for the inference that the Defendants acted
with scienter. See Turkish v. Kasenetz, 27 F.3d 23, 28 (2d Cir. 1994) (citing Beck v. Mfrs.
Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987) (holding that Rule 9(b) demands “some
factual basis for conclusory allegations of intent”); cf. SEC v. Unifund SAL, 910 F.2d 1028, 1041
(2d Cir. 1990) (vacating a preliminary injunction: “the record discloses [] unusual trading by [the
defendants] on the eve of the merger announcement. They may well have had inside information,
but possession of such information without more does not give rise to a duty to disclose or
abstain from trading, at least where the recipient of the information is an ordinary investor.”
(citation omitted)).
The SEC argues that it need not allege these details. The SEC’s opposition brief cites
decisions holding that the SEC stated a claim for tippee liability without identifying a particular
16
tipper, and in another string citation, cases holding that the SEC stated a claim without alleging
the specific content of the tip.
While it is not strictly necessary that a complaint specify either of these details, it is
necessary that the allegations as a whole support a reasonable inference as to each element of
tippee liability. The complaint must sketch the outlines of an unlawful trade. Although the SEC
need not paint in fine detail, the allegations must provide enough information such that, stepping
back, the Court can see a comprehensible picture of insider trading. Thus, in each of the SEC’s
cases lacking details about the content of the tip, attendant circumstances nevertheless made it
reasonably clear that there was an actual tip consisting of material nonpublic information.
Aragon Capital Advisors, LLC, 2011 WL 3278907 at *12 (tipper admitted to tipping material
nonpublic information in a plea allocution); SEC v. Gad, No. 07 Civ. 8385 (GEL), 2007 WL
4437230, at *1–*2 (S.D.N.Y. Dec. 17, 2007) (tipper in possession of confidential third quarter
financial results had series of phone calls with tippee; tippee initiated trades within minutes of
the final call); Alexander, 160 F. Supp. 2d at 646–49 (on more than one occasion, tipper who
knew about merger negotiations called her boyfriend, who soon thereafter called tipper’s
attorney, who soon thereafter purchased call options; boyfriend and attorney also called their
friends, who soon thereafter purchased stock and call options).
Likewise, although it is not strictly necessary to identify a tipper, complaints cited by the
SEC that did not identify a tipper 11 contained enough information about other aspects of the
11
The SEC cites SEC v. Ginsburg, 2000 WL 1299020 (S.D. Fla. Jan. 10, 2000), as authority
holding that the SEC need not identify a tipper to survive a motion to dismiss. While Ginsburg
does mention that proposition as dictum in a footnote, the tipper was actually identified in that
case. At *1, *2 n.2. The SEC also cites Unifund for the same proposition. Unifund’s holding
concerned the standard for preliminary injunctive relief, not the sufficiency of the complaint.
910 F.2d 1028. Furthermore, Unifund held that in the absence of an identified tipper, the SEC
could not “bridge [the] fundamental gap in its evidence with speculation,” and thus the SEC was
entitled to no more than a thirty-day freeze order. At 1040, 1042.
17
unlawful trades to reasonably imply a limited class of tippers. 12 Suterwalla, 2008 WL 9371764
at *4 (tippee made twelve different trades keyed to confidential events such as conference calls);
SEC v. Lambert, 38 F. Supp. 2d 1348, 1349 (S.D. Fla. 1999) (tippee purchased stock after
attending football game in a suite with principals representing company in merger); Energy
Factors Inc. v. Nuevo Energy Co., 1992 WL 170683, at *1–*2 (S.D.N.Y. July 7, 1992) (tippee
company had “close and continuing relationship” with company whose stock it bought; multiple
phone calls from President’s office to tippee company shortly before stock purchase). Each of
the foregoing complaints was lacking an important detail, but the complaints compensated for
that shortcoming with other allegations that supported an inference to fill in the blanks. See also
SEC v. Kueng, No. 09 Civ. 8763 (BSJ), 2010 WL 3026618, at *1, *3 (S.D.N.Y. Aug. 2, 2010)
(holding that tip was so detailed that it supported an inference to the defendant’s scienter); cf.
SEC v. One or More Unknown Purchasers of Securities of Telvent GIT, SA, 2013 WL 1683665,
at *1 (S.D.N.Y. Apr. 13, 2013) (SEC moved to dismiss its own enforcement action because it
was “unable to identify the source of any material, non-public information relating to the
transactions”).
12
One case cited by the SEC, SEC v. Heider, No. 90 Civ. 4636 (CSH), 1990 WL 200673
(S.D.N.Y. Dec. 4, 1990), upheld a complaint that failed to identify a limited class of tippers. The
complaint in that case alleged that the defendants’ securities trades “have operated, are operating
and will operate as a fraud or deceit upon certain individuals and entities, including but not
limited to [the merging companies], from which material nonpublic information was
misappropriated, received or otherwise improperly obtained in breach of a fiduciary duty of trust
and confidence.” Id. at *1. Heider held that these allegations satisfied Rule 8, relying on Conley
v. Gibson, 355 U.S. 41, 45–46 (1957) (holding that a court cannot grant a Rule 12(b)(6) motion
unless it appears “beyond doubt that the plaintiff can prove no set of facts in support of his claim
which would entitle him to relief”). Heider at *2. Subsequent Supreme Court cases have made
it clear that bare-bones allegations like those in Heider do not satisfy Rule 8. See Iqbal, 556 U.S.
at 678–79. To the extent that Heider held such allegations to be particular enough to satisfy Rule
9(b), this Court simply must disagree.
18
In contrast, the factual allegations in this case are insufficient to support a reasonable
inference of insider trading. There is no indication that the SEC knows whether material
nonpublic information was tipped, who did the tipping, or who received the tip. It is impossible
to infer that the Defendants acted with a culpable state of mind in the absence of that
information. “A complaint alleging fraud should be filed only after a wrong is reasonably
believed to have occurred; it should serve to seek redress for a wrong, not to find one.” Segal,
467 F.2d at 607–08. This complaint appears to have been filed in search of a liable tippee. The
complaint must be dismissed.
c.
Leave to Amend
The SEC has requested permission to amend the complaint if the Court grants this
motion to dismiss. (Pl.’s Opp. at 8.) Leave to amend a complaint must be “freely given when
justice so requires.” Fed. R. Civ. P. 15(a). When a court grants a motion to dismiss, it is often
appropriate to grant leave to amend the complaint—particularly when Rule 9(b) applies. ATSI,
493 F.3d at 108 (citing Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir. 1986)). Leave to amend may
be denied if amendment would be futile. Grullon v. City of New Haven, 720 F.3d 133, 140 (2d
Cir. 2013) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)).
Here, filing an amended complaint would not be necessarily futile. The SEC may file an
amended complaint within thirty days of the date of this opinion and order.
B.
Appropriate Scope of the Asset Freeze Order
1.
Legal Standard
District courts enjoy general equity powers under Section 27 of the Securities Exchange
Act of 1934. Smith v. SEC, 653 F.3d 121, 127 (2d Cir. 2011) (citing SEC v. Manor Nursing
Ctrs., Inc., 458 F.2d 1082, 1103 (2d Cir. 1972)). Once these powers are invoked by a showing of
a securities law violation, the court has the power to order all equitable relief necessary,
19
including an asset freeze. Id. (citations omitted). An asset freeze is intended to preserve funds
that a defendant may be ordered to pay if he is held liable. Id. (citing Unifund, 910 F.2d at
1041).
Section 21(d) of the Securities Exchange Act requires courts to grant the SEC’s
application for injunctive relief “upon a proper showing.” 15 U.S.C. § 78u(d)(1). The standard
for an asset freeze is not as high as the usual standard for a preliminary injunction; rather, the
SEC is required to show either a likelihood of success on the merits or that “an inference can be
drawn” that the defendant violated federal securities law. Smith, 653 F.3d at 128 (citing SEC v.
Byers, No. 08 Civ. 7104 (DC), 2009 WL 33434, at *3 (S.D.N.Y. Aug. 8, 2011)). The decision to
freeze assets, or to modify an asset freeze, is committed to the district court’s discretion. Id. at
127 (citing SEC v. Am. Bd. of Trade, Inc., 830 F.2d 431, 438 (2d Cir. 1987)). A district court
exercising that discretion should consider the type of relief sought by the SEC when evaluating
the likelihood of success on the merits. Id. at 128 (citing Unifund, 910 F.2d at 1039). Asset
freeze orders are less burdensome on defendants than other types of injunctive relief; for that
reason, the required showing of success on the merits (or a permissible inference) is lower,
especially if the freeze order is limited in duration. See Unifund, 910 F.2d at 1039, 1041 (citing
SEC v. Levine, 881 F.2d 1165, 1177 (2d Cir. 1989)) (“[A]n ancillary remedy may be granted,
even in circumstances where the elements required to support a traditional SEC injunction have
not been established, . . . and such a remedy is especially warranted where it is sought for a
limited duration.”). The district court may assess any relevant circumstance to determine the
coverage, terms, and duration of an asset freeze, if one is appropriate. SEC v. Unifund SAL, 917
F.2d 98, 99 (2d Cir. 1990), denying pet. for reh’g of 910 F.2d 1028.
The Second Circuit has suggested that an asset freeze order may be sustained even if the
SEC has failed to state a claim. In Unifund, the Defendants in an SEC enforcement action
20
appealed the district court’s order (1) enjoining future violations of § 10(b) and Rule 10b–5 and
(2) freezing their accounts, subject to trading approved by the SEC. 910 F.3d at 1029. The
Circuit vacated the injunction prohibiting future securities fraud, holding that the SEC asked the
Court to infer the necessary relationship between an unidentified tipper and the Defendants from
“wholly inadequate circumstances.” Id. at 1040. Yet when it came to the freeze order, the Court
held that the SEC had demonstrated “a basis to infer” insider trading, which was enough to
affirm a time-limited freeze order. Id. at 1041 (emphasis added). While the Court in Unifund
did not rule on the sufficiency of the complaint, the Court’s holding suggested that so long as
there is “a basis to infer” liability, a limited freeze order is appropriate to preserve the SEC’s
opportunity to prove its case. Id. (emphasis added) (“[W]hile the Commission is endeavoring to
prove at trial the requisite element of trading in breach of a fiduciary duty of which the
defendants were or should have been aware, the Commission should be able to preserve its
opportunity to collect funds that may yet be ordered disgorged.”) But if the SEC’s evidence is
especially weak, the freeze order should be correspondingly limited. Cf. Unifund, 917 F.2d at 99
(“[I]n view of the Commission's meager showing on the merits, we concluded that the
Commission would have to face the choice of either proceeding to trial rapidly with the benefit
of the freeze order or preparing for trial beyond our thirty-day limit without the freeze order.”
(quotation marks and citation omitted)).
2.
Application
Although the complaint does not allege particular facts about the circumstances of the
alleged fraud, or facts that support a strong inference of scienter, the SEC has nevertheless
demonstrated a basis—however tenuous—for a possible inference that the Defendants are liable
as tippees. The SEC originally submitted three declarations in support of its application for a
freeze order. (Dkt. Nos. 28–30.) To the extent that the information in these declarations is
21
relevant to the merits of the SEC’s claim, the information is alleged in the complaint—with the
exception of the data submitted with the declaration of Andy Ganguly, a Staff Accountant with
the SEC. (Dkt. No. 30.) Exhibit 3 to Ganguly’s declaration includes the volume of July $80,
$85, $90, and $92.50 call options purchased each day between April 1, 2013 and July 1, 2013.
These data show that, with the exception of the July $90 call options, the size of the trades at
issue was unprecedented during the weeks leading up to June 26–28. But the data also show that
the Defendants were not always alone: the trades at issue constituted 100% of the July $80 call
options purchased June 26, but only 43% of the July $85 call options purchased the same day,
64% of the July $85 call options purchased June 27, 16% of the July $90 call options purchased
June 28, and 57% of the July $92.50 call options purchased June 28. This means that, on the
same day as the trades in question, either one or two other traders purchased these call options in
an unprecedented amount, or many other traders purchased these call options all at once. It
would be suspicious if just one or two traders made unprecedented purchases of these call
options immediately preceding the announcement of Amgen’s offer, but not if many traders did
so. Cf. SEC v. Gonzalez de Castilla, 145 F. Supp. 2d 402, 421 (S.D.N.Y. 2001) (vacating a
freeze order under similar circumstances; inferring from media speculation and a spike in trading
volume that, when the defendants made their trades, “the word was out” about the confidential
tender offer).
Jafar and Nabulsi, on the other hand, have filed declarations and other evidence that there
is an innocent explanation for their trading. Both Defendants claim that they generally choose
highly speculative investments, and that they frequently invest large sums of money with varying
degrees of success. (Jafar Decl. ¶¶ 12–14, Dkt. No. 19; Nabulsi Decl. ¶¶ 9–11, Dkt. No. 20.)
The Defendants have submitted evidence to support this claim about their trading history. (Jafar
Decl. Ex. B; Nabulsi Decl. Ex. B.) They explain that, in addition to the volume of call options
22
that had recently been purchased, they also considered the fact that Onyx stock usually
experienced large single-day fluctuations, and that the stock had experienced a prolonged dip in
June. (Jafar Decl. ¶¶ 10–11; Nabulsi Decl. ¶¶ 17–20.) Nabulsi had seen two positive media
reports about Onyx. (Nabulsi Decl. ¶¶ 12–13; 16.) Finally, Jafar had noticed an increase in the
market for Onyx Contracts for Difference early in the week of June 24, 2013, which both Jafar
and Nabulsi took to be a sign that Onyx’s stock price would soon increase. (Jafar Decl. ¶¶ 15–
18; Nabulsi Decl. ¶ 15.)
The SEC’s evidence supports “an inference” of insider trading, even in the face of Jafar
and Nabulsi’s submissions. The data in Ganguly’s declaration strengthen the inference that Jafar
and Nabulsi traded using inside information. Although Jafar and Nabulsi are able to offer
evidence in support of an alternative explanation, it is possible to infer from the size of their
trades and the lack of other trading activity that they and the Barclays Defendants traded on
inside information. Yet this inference, while possible to draw, is not well-supported by the
SEC’s evidence. The Second Circuit’s approach in Unifund is instructive. The Court will
extend the freeze order for thirty days, during which the SEC may prepare an amended
complaint. If the SEC files an amended complaint that contains new allegations within thirty
days, the freeze order will be extended pending further order of the Court. Otherwise, the freeze
order will be vacated and this case will be dismissed.
The Court also must resolve a dispute between the parties about the amount of money
subject to the freeze order. Jafar and Nabulsi concede that the Citigroup account contains
$2,527,295 in proceeds from the trades at issue. (Defs.’ Mem. at 15.) According to counsel for
the SEC, Citigroup determined that $2,636,892.50 should be frozen, “based on [Citigroup’s] own
analysis of activity in the account in Onyx securities.” (Bulgozdy Decl. ¶ 10.) Counsel further
affirms that Citigroup “is continuing to analyze the activity, and may adjust this amount.” (Id.)
23
The SEC has not provided the Court with any information about how Citigroup concluded that
$2,636,892.50 should be frozen, or any other basis for calculating the proceeds from the trades at
issue. The SEC has also failed to explain why Citigroup needs to perform an ongoing analysis
on transactions that were completed more than four months ago.
The SEC’s position that the freeze order need not be modified, yet Citigroup should be
permitted to change the amount frozen unilaterally and without notice, is unpersuasive. It is
insufficient for the SEC to oppose modifying the freeze order on the ground that the
$2,636,892.50 that Citigroup has chosen to freeze “roughly equates” to the $2,527,295 that Jafar
and Nabulsi concede represents the actual proceeds from the trades at issue. (Pl.’s Opp. at 15.)
There is no reason to oppose a clear and accurate freeze order. And although there is more than
$2 million at stake, the Court would not characterize two sums with a difference of more than
$100,000 as roughly equivalent.
III.
Conclusion
For the foregoing reasons, Defendants’ motion to dismiss the complaint is GRANTED
without prejudice. The SEC is granted leave to file an amended complaint without 30 days.
The Court’s July 10, 2013 Order Freezing Assets and Granting Other Relief is hereby
clarified to state that it applies to $2,527,295 of assets in the account held at Citigroup Global
Markets, Inc. and/or its affiliates under the name FFA Private Bank SAL, account number
62301460.
24
The Clerk of Court is directed to terminate the motion at Docket No. 17.
SO ORDERED.
Dated: New York, New York
November 21, 2013
25
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